Financial Condition Report
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FINANCIAL CONDITION REPORT For the Year Ended December 31, 2016 Table of Contents 3 BUSINESS AND PERFORMANCE 4 GOVERNANCE STRUCTURE 19 RISK PROFILE 23 SOLVENCY VALUATION 25 CAPITAL MANAGEMENT 28 SUBSEQUENT EVENTS 29 APPENDIX A - OWNERSHIP DETAILS 30 APPENDIX B - GROUP ORGANISATIONAL CHART 31 APPENDIX C - OVERVIEW OF INSURANCE BUSINESS WRITTEN 32 APPENDIX D - GROSS AND NET PREMIUM WRITTEN 33 APPENDIX E - GROSS PREMIUM WRITTEN BY GEOGRAPHIC REGION 34 APPENDIX F - PERFORMANCE OF INVESTMENTS BY ASSET CLASS 35 APPENDIX G - MATERIAL INCOME AND EXPENSES INCURRED 36 APPENDIX H - BOARD OF DIRECTORS OF HAMILTON INSURANCE GROUP, LTD. 38 APPENDIX I - OFFICERS OF HAMILTON INSURANCE GROUP, LTD. 39 APPENDIX J - BOARD OF DIRECTORS OF HAMILTON RE, LTD. 40 APPENDIX K - OFFICERS OF HAMILTON RE, LTD.: POSITIONS AND RESPONSIBILITIES 41 APPENDIX L - RECONCILIATION OF SHAREHOLDERS’ EQUITY TO AVAILABLE STATUTORY CAPITAL AND SURPLUS 42 APPENDIX M - DECLARATION Business and Performance a. Name of the insurance group and designated insurer Insurance Group: Hamilton Insurance Group, Ltd. Designated Insurer: Hamilton Re, Ltd. b. Name and contact details of the insurance supervisor and Bermuda Monetary Authority (the “Authority”) group supervisor Jurisdiction – Bermuda [email protected] 1 (441) 295-5278 (The Authority is both insurance and group supervisor) c. Name and contact details of the approved auditor Ernst & Young Ltd. 3 Bermudiana Road Hamilton HM 08 Bermuda Craig Redcliffe [email protected] 1 (441) 295-7000 d. Description of the ownership details, including proportion of Hamilton Insurance Group, Ltd. – 90 shareholders as ownership interest of December 31, 2016 (see Appendix A) Hamilton Re, Ltd. - 100 percent owned by Hamilton Insurance Group, Ltd. (see Appendix B) e. Group structure chart detailing the group structure See Appendix B f. Insurance business written by line of business and by See Appendices D and E geographic region g. Performance of investments and material income and expenses See Appendices F and G for the reporting period h. Any other material information Not applicable FINANCIAL CONDITION REPORT 3 Governance Structure A. BOARD AND SENIOR EXECUTIVE i. Board and Senior Executive Structure, Role, Responsibilities and Segregation of Responsibilities The Board of Directors of Hamilton Insurance Group, Ltd. (the “Group Board”, with Hamilton Insurance Group, Ltd. identified as “Hamilton Group,” and reference to the entire Hamilton group of entities being the “Group”) has responsibility for all strategic and material operational decisions of the Group, inclusive of oversight of its Subsidiaries (as defined below). The boards of directors or equivalent of the legal entities shown in Appendix B (which comprise the “Subsidiaries” in the Group’s Bermuda, US and UK operating platforms, including the Group’s designated insurer in Bermuda, Hamilton Re, Ltd. (“Hamilton Re”)) have responsibility for those matters affecting those entities not assigned to the Group Board under the Bye-laws of Hamilton Group. The Group Board is responsible for setting strategies and policies and overseeing corporate governance, risk management and the internal controls framework. The Group Board is comprised of eleven members, ten of whom are non-executives, as identified in Appendix H. The Group Board has formed the following standing Committees: the Underwriting and Risk Committee, the Investment Committee, the Finance and Governance Committee, the Audit Committee, and the Compensation and Personnel Committee (collectively, the “Committees”). The Group Board and Committees generally meet on a quarterly basis. The Group Board delegates the management of the operations of Hamilton Group and its Subsidiaries to the Group Chief Executive Officer and other members of executive management. This includes the development and implementation of internal controls, budgets, and strategic issues, subject to the oversight of the Group Board (and its Committees). Management reports directly to the Group Board on at least a quarterly basis. Hamilton Re has “delegated up” to the Group Board (and its Committees) certain corporate governance functions. The Group Board members, through their presence on the Committees, oversee the frameworks in place related to corporate governance, internal controls, finance, underwriting, investment, claims and risk management functions for Hamilton Re (as well as other Subsidiaries). For example, this would include the development and oversight of underwriting guidelines and the internal audit process for Hamilton Re. As a result of the reporting at the regular Group Board and Committee meetings described herein, the Group Board has sufficient knowledge of Hamilton Re’s business to ensure that adequate policies and procedures are implemented by Hamilton Re. As a function of this knowledge, no separate governance committees have been established by Hamilton Re. See Appendix I for a list of officers of Hamilton Group and a description of their positions and responsibilities. See Appendix J for a list of directors of Hamilton Re. See Appendix K for a list of officers of Hamilton Re and a description of their positions and responsibilities. ii. Remuneration Policy The Group Compensation and Personnel Committee has developed a remuneration program that includes fixed annual base salary, competitive employee benefits, and the opportunity to earn annual cash incentive awards and long-term (equity) awards based on Group and individual performance. FINANCIAL CONDITION REPORT 4 The compensation program is designed to provide a balanced mix of salary, annual incentive compensation, and long- term incentive compensation, the realisation of which depends upon the attainment of a range of performance metrics. The mix of types of compensation is not overly weighted toward a single form of compensation, or inappropriately designed to overly encourage short-term financial results or unbalanced operational execution, and instead promotes the pursuit of long-term financial performance, enterprise-wide, prudent risk management, and stewardship of capital. Long-term incentive compensation aligns management and shareholder interests and is an important tool for talent retention. The Group’s long-term plan currently consists of Restricted Stock Units (RSUs) that vest over a three-year term based on service. In addition, beginning in 2017, a portion of the RSU awards for certain senior executives will be subject to underwriting performance-based vesting conditions. The Group’s compensation for directors is weighted toward share awards, which may constitute up to 100 percent of a director’s compensation at his or her election, in accordance with established policies approved by the Group Board. The Group Compensation Committee reviews the material terms of the Group’s compensation program at least annually, in light of the Group’s strategic and business plans, which includes periodic peer-group compensation comparisons. iii. Pension or Early Retirement Schemes for Members, the Board and Senior Executives Hamilton Group and Hamilton Re have adopted defined contribution pension plans and contribute a percentage of pensionable earnings on behalf of all eligible employees. Employees may elect to make additional voluntary contributions into their applicable pension plan. The funds are then invested into fund options chosen by the specific employee, and are administered by a third-party advisor. There is no supplementary pension or early retirement scheme for members, the Group Board, the boards of directors of the Subsidiaries, or senior executives. iv. Shareholder Controllers, Persons Who Exercise Significant Influence, the Board or Senior Executive Material Transactions Two Sigma Hamilton Fund, LLC (“TS Hamilton Fund”), a Delaware limited liability company, was formed in October 2013. Hamilton Re entered into a limited liability company agreement with TS Hamilton Fund and Two Sigma Principals, LLC as the managing member of TS Hamilton Fund (the “Managing Member”). Hamilton Re has committed to invest all of its investable assets in TS Hamilton Fund, other than a portion thereof that it holds in cash and cash equivalents as a liquidity buffer. TS Hamilton Fund has engaged Two Sigma Investments, LP (“Two Sigma”), a Delaware limited liability company and a related party, to serve as its investment manager for a term ending on December 31, 2019. Two Sigma is a United States Securities and Exchange Commission (“SEC”)-registered investment adviser specialising in quantitative analysis. Hamilton Group is party to a services agreement with Two Sigma, under which Hamilton Group and its Subsidiaries receive certain advisory services. The agreement, as amended on March 8, 2016, continues for a term of two years, unless earlier terminated by either party. Hamilton Group has agreed to pay $250,000 per year in consideration of the contracted services. FINANCIAL CONDITION REPORT 5 B. FITNESS AND PROPRIETY REQUIREMENTS i. Fit and Proper Process in Assessing the Board and Senior Executives The Group Finance and Governance Committee, is charged with overseeing the selection of new directors in accordance with documented qualifications. The Group Board undertakes an annual self-assessment to determine the effectiveness of the Group Board and its Committees. All prospective employees, both for Hamilton Group and its Subsidiaries, undergo a diligence and interview process. Group Board approval is required for employment of the Chief Executive Officer of the Group and his or her direct reports. An